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03 August 2010

This week: Go the distance with Milestone, Polo Resources offers sweet rewards and One Media is music to the ears

Amur Minerals Corporation (AMC 4.25p/ £8.96m)The US$84m NPV10 value detailed in the original pre-feasibility study carried out by SRK was predicated on a nickel price of US$7.50/lb, or US$16,535 per tonne. The sensitivity of the valuation to an increase (or decrease) in the nickel price, is that a rise of US$1/lb Ni adds US$100m to the NPV10.
The current nickel price is US$20,525/tonne, equivalent to $9.30/lb……..

Anglesey Mining (AYM 29p/£44.42m)Anglesey’s 41 percent owned associate company and Toronto Stock Exchange listed Labrador Iron Mines Holdings has moved one important step closer to mining operations as it is now in possession of a certificate of approval for the construction of its mining facilities. The company is still facing a few more hurdles including an operating permit for the mine and a permit to use a new railway completed in June that will be used to transport equipment and plant modules to the site. Construction and commissioning will proceed as soon as these approvals are obtained, but the company is working against a deadline of late November for the initial start up which is when the seasonal operations end. The goal is to see full scale commercial production by April 2011 with a production of 2 million tonnes of iron ore during next year.

Avacta (AVCT 0.78p/£11.12m)We last wrote on Avacta in November 2009 after their results and a placing of shares at 1.5 pence each. Since that date, the Company has announced the acquisition of Reactivlab for shares; a further share placing in July 2010, grossing £1.38m; and the disappointing news that sales of its Optim unit have proved slow.
With free cash available as at the end of January 2010 of c. £1.05m (taking into account trade debtors and creditors) and a cash burn of c. £160k per month (which investors should have expected to rise on the back of increased marketing and commercialisation costs) the recent share placing should not have been a surprise. However the shares have performed poorly – particularly since May, when one presumes that the Company’s financial position started to become more widely known in the market.
Having stated the above, Avacta does appear to be addressing the main cause célèbre for similar small medical device companies – that of distribution. Many such companies have tried to build their own sales and distribution networks, but few, if any have succeeded. The recent statement alluded to potential distributor agreements being negotiated – which we hope will be announced in the near future. Additionally, the Company is expecting to be able to launch its new veterinary diagnostic product, Midas, and the formalisation of consumable supply agreements with customers.
Despite the votes of confidence demonstrated by the Directors and some existing shareholders through their purchases of shares in the placing, we do not expect to see the shares perform until the indicated distribution partner agreement(s) for Optim are signed and sales begin to flow. Further, we hope that the Company decides to move directly to tie up with an appropriate distributor for Midas, rather than attempting first to distribute the product in-house. This is not a share we would aggressively purchase at this time.

Datum International (DATP 8.5p/£4.32m)Last week PLUS quoted software Company Datum announced its final results for the year ended 30th April 2010. Revenue from continuing operations was up by 120 per cent to £781,320 (2009: £354,100). Datum announced maiden profits in its results before tax (PBT) of £165,111 (2009: £395,800 loss) and reported that at the period end it had cash of £220,054 (2009: £6,226). During the period in question, it appointed a new CEO and Finance Director, successfully acquired and integrated Root 3, won 25 new customer contracts including Nottingham University, The Medical Defence Union, Marsh Insurance, William Hill and Gloucester NHS Trust and renewed 36 existing customer contracts including Thales, Birmingham City Council, Edinburgh City Council, Royal Mail/CSC, Bombardier and Severn Trent.
We believe that the company will be looking for more acquisitions; either complementary technology or a business with stable and recurring revenues. Despite a preponderance of clients in the public sectors, such as hospitals and county councils, Datum should benefit from cost cutting since its products work on a localised level and are cost saving. Q1 trading is in line with management expectations and we look forward to the Company reporting ongoing profitability and good results.

Epistem (EHP 347.5p / £27.57m)Biotech company Epistem announced a trading update this week. Performance over the year has improved in line with market forecasts, and the Company expects to report a growth in profit after tax. Epistem is a well-managed biotech that develops drugs and biomarkers and provides contract research services to drug development companies. We like the model of a fee-for-service business that pays for its own in-house R&D. We look forward to seeing the results for the year ended 30th June on the 5th October 2010 which is when Epistem will hold an analyst meeting.

Filtronic (FTC 34p/£25.27m)Filtronic, who operate in the wireless telecoms market, last week announced its preliminary results for the year to 31 May. Performance was somewhat subdued, with revenue down 46% to £15.6m, leading to an operating loss (after exceptional items) of £1.1m (2009: £1.2m). Filtronic has faced difficult trading conditions given industry volatilities, though it still managed to sign a major OEM customer at the end of 2009. Furthermore, for a Company with net assets of £19.9m (2009: £21.6m), it has been able to maintain a cash balance of £16.2m. This appears to be quite high, even when considering the Company’s intended strategy of focusing on organic growth and acquisition. One of those acquisitions is likely to be Isotek, the developer of telecommunications products for wireless applications, with consideration of £4.35m and 18.5m Filtronic shares. Whilst we see great potential with this acquisition, given the uniquely attractive qualities of Isotek’s product line, cash expenditure remains low and the year-end balance continues to be significantly high. Other areas of the working capital cycle have however been streamlined, with reductions generating £2.4m of extra cash. Further, future acquisitions may be funded using the Company’s available cash, as would a strategy for organic growth (Filtronic’s intention to grow its sales force, as an example). Whilst results for the Company are constrained for the year, we keep a keen eye on how this Company moves.

Gulfsands Petroleum (GPX 301.75p/£365.65m)Gulfsands, the oil and gas production and exploration company, provided an update for the Tunisia Drill. Gulfsands is working with ADX Energy, who are operating the Kerkouane Exploration Licence offshore Tunisia, on the Lambouka-1 well (Gulfsands is acquiring a 30 per cent participating interest in the licence). Whilst the rig being used has previously faced power supply issues, a resolution has been achieved, followed by a wiper trip of 26″ hole being conducted, a 20″ casing being run and cementing performed to a depth of 922m. Rig anchors were also tested to storm tension compliance. Operations were suspended due to bad weather, although they recommenced yesterday, with drilling operations for the week ahead likely to include drilling a 16” hole to 1,340 meters and drilling a 12” hole to the predicted base of the Birsa Sandstone formation (the first and shallowest reservoir that is potentially hydrocarbon bearing). This is positive news for the Company and we look for further updates on the results from the drill.

Herencia Resources (HER 0.72p/£6.87m)The final assay results from Herencia’s current drilling programme at the Paguanta zinc-lead-silver-gold project in Northern Chile have come back from the lab. Results from the last eight holes include further high grade mineralisation and confirm the existence of a new vein as well as extensions to the main Cathedral vein.
Herencia has conducted this drilling programme extremely well. A total of 24 diamond drill holes were drilled for 5,728 meters and was completed on time and within budget. The results showed high grades of zinc, lead and silver as well as the presence of gold in most holes (which is not included in the current resource estimate). An update of the Mineral Resource Estimate is expected by the end of September which would allow Herencia to move to a Feasibility Study phase in the fourth quarter.

Highams Systems Services Group (HSS 2.5p/£1.73m)Highams, the recruitment consultancy and niche provider of technology, business and professional services to the insurance and financial sectors, announced final results for the year to 31 Mar 2010. Highams generated a profit of £131,000 (2009: loss of £370,000) for the year, whilst revenue was down 29 per cent to £7.5m reflecting a consolidated number of contractors working at client sites. Further, although gross profit for the year fell to £1.26m (2009: £1.76m), margin efficiency gains (profit margin of 16.8 per cent compared to 16.7 per cent in the prior year) and reduced staff levels enabled the Company to generate a profit for the year instead of a loss, demonstrating sound performance in what is generally considered to be a difficult market. The balance sheet showed reasonable improvements too with net assets increasing to £296,000 (2009: £63,000)- a healthy portion of which is due to the recognition of a deferred tax asset for this year. With the Company exploring the possibility of acquisitions, we like the sensible approach being taken to improve the Company’s fortunes and feel Highams has much to look forward to.

Hutchison China MediTech (HCM 356p/£188.83m)Chi-Med last week reported interim results for the six months ended 30 June 2010: sales were up 29 per cent to $73.2m (H1 2009: $56.7m), operating profit was up 314 per cent to $2.3m (H1 2009: $0.6m) and the Company had cash of $40.4m (30 June 2009: $39.6m, 31 December 2009: $41.8m).
In the China Healthcare Division, the net profit was up 31 per cent to $8.6m (H1 2009: $6.6m). The Company said that “Whilst the China Healthcare Division is traditionally first half weighted, we would expect robust full year sales growth with margins continuing to strengthen.” Chi-Med is looking to work with partners to expand the scope of its joint ventures and bring new products on line.
In the Drug R&D Division, the clinical portfolio progressed well and the Company said: “In Hutchison MediPharma, work towards a partnering deal for the co-development of HMPL-004, our lead drug for Inflammatory Bowel Disease, is continuing to progress well, and we expect to start global multi-centre Phase III trials towards the end of 2010 or the first quarter of next year.” HMPL-004 is being discussed for partnering and the division as a whole looks like it is moving towards being a standalone China oncology Company.
In the Consumer Products Division, sales were up 152 per cent to $4.2m behind the launch of organic products in Hong Kong. The Company said” “In our Consumer Products Division, we expect continued expansion of Hutchison Hain Organic and Sen sales as we continue to work towards a broader China consumer products strategy.” France is growing well for this division, although a few stores were closed in London where it isn’t as successful. However the CEO said that in China and Asia, they are only just scratching the surface and look forward to the launch of the infant formula in China following the success of the Omega 3 fatty acids for pregnant women. China is a captive market for new found “healthy living” with 300m smokers, poor living conditions, worsening eating habits, whilst education and a better quality of life are being sought after.
This low-risk, high-reward specialty pharma, has risen nearly 100 pence since we last wrote on the stock three months ago. This is still one to watch in our opinion because we like the mix of different businesses (biotech drug development, generics and healthcare products) and also geographical areas (Europe, Mainland China…) and suggest it is well worth a look.

IPSO Ventures (IPS 16p / £2.43m)The demand-led technology commercialization business, last week announced its unaudited preliminary results for the year ended 30 April 2010. Revenue increased significantly from £27,000 to £83,000 during the period through complementary revenue generating initiatives.
The Company made further investments totalling £307,000 in the period. These were spread across its core sectors of activity – developing wound management and other diagnostic and measurement technologies, software products and the solar photovoltaic market. Ipso recorded an increase of £151,000 in the fair value of their investments. The Company has undoubtedly made good progress in their investment portfolio. We don’t think that this one will catch a cold anytime soon.

IS Pharma (ISPH 67.5p/ £20.76m)IS Pharma gave an update for the first 3 months to June stating that trading has been in line with the Board’s expectations and ahead of the same period last year. Sales in the UK of Variquel (used in the treatment of oesophageal bleeding) continue to grow and European sales are showing the benefit of the significant number of commercial launches. In addition, its newly acquired Episil drug (an oral spray used to relieve pain resulting from chemo- and radio- therapy during cancer treatment) has been launched commercially in the UK, with Europe being rolled out.
With an eye for more acquisitions in its core high growth areas and expectations that the Company will continue to demonstrate sound revenue expansion, we find the shares attractive.

Lok’n Store Group (LOK 86p/£22.03m)This is our first comment on Lok’n Store Group plc, the AIM listed self-storage company. It is the 4th largest quoted self storage company with gross property assets of c. £80m, bank borrowings of c. £28m and therefore NAV per share of approximately 194p/ share.
The company, whose properties are located in the South and South East of England, charges average prices some 20 per cent lower than competitors and has received and rebuffed a number of takeover approaches in the past.
The fundamentals of the business and its industry are attractive and we would expect the company’s financial performance to continue to improve. We would also expect that due to its particular characteristics, the Company will continue to receive bid approaches, which will be rejected unless an offer reflects fully the value of the business – not least because the CEO, Andrew Jacobs, holds in excess of 20 per cent of the issued shares.
Certainly a share to buy and lock away!

Milestone Group (MSG 1.6p/£1.71m)*AIM listed digital solutions and technology agency, last week had two announcements.
It announced that it issued shares at a price of 1.25p raising £13,500 and also that it had issued 15,000,000 shares at 1p per share to HBS 049 Limited, raising £150,000. Post admission, HBS 049 Limited will hold 11.8 per cent of the enlarged issued share capital. The HBS Subscription is in addition to the convertible loan of £150,000 provided by HBS to the Company, pursuant to the loan agreement announced on 31 March 2010. Milestone also announced that it has agreed to issue 4,401,774 shares at 1.25p per share to certain creditors in lieu of £55,022 payable in respect of services provided to the Company.
Milestone also announced the appointment of Anthony Moss to the Board as a Non-Executive Director. As part of the recent subscriptions, HBS 049 Limited had the right to appoint a non-executive Director to the Board and have nominated Anthony Moss as their representative. Anthony Moss is a business advisor with extensive experience in mentoring and creating business networks. He is a fellow member of the Fellow Institute of Recruitment Professionals (FIRP), Fellow Member British Chartered Management Institute (FBCMI) and of the Fellow of the Institute of Directors (FIOD). He is also a member of the Executive Association of Great Britain (EAGB) and the Academy of Chief Executives (ACE).
MSG is now firmly focused on generating revenue and we believe that this stock is well worth a look now that its turnaround is complete.

One Media Publishing Group (OMPP 2.25p/£2.06m)This PLUS quoted media Company that is involved in Business to Business music and video rights has seen its share price double in the past four months. Last week it reported its unaudited half yearly report for the six month period ended 30 April 2010. In the last six months the Group has acquired three additional substantive music catalogues and delivered over two thousand new music compilations to its global digital retail stores.
For the six months to 30 April 2010 the Group’s reported turnover was £580,949 (2009: 344,161), an increase of 69 per cent. The profit before tax for the period was £104,556, a significant increase compared with the equivalent period in 2009 (2009: £5,667). As at 30 April, the Company had cash balances of £153,927.
The Group continues to watch the music market with vigilance for any developments particularly as concerning the “majors” such as EMI and Time Warner. The half year results are encouraging and demonstrate that to date the business model is correctly situated in the “digital” download market. We imagine that One Media will continue to explore digital content acquisitions under license or by straight purchase and expect to see further news on that front in the near future.

Polo Resources (POL 6.32p/£150.45m)Since our last comment a few weeks ago, the shares have shown continued strength. After receiving a takeover approach from Laxey Partners that materially undervalued the Company, Weiss Asset Management popped up holding a 10.6 per cent interest.
Since the 2nd week of July (and including the latest announcement of the 15m exercise of options by Paul Ingram) the Directors have purchased almost £5.4m shares in the Company between them. c. £4m were acquired by the Chairman, Stephen Dattels, taking his shareholding to 186.7m shares (7.85 per cent of the total number of shares in issue) and Neil Herbert, Managing Director, now owns 69.1m shares (2.91 per cent).
On a sum of the parts basis, using the current share price for the 29.83 per cent holding in GCM and the widely rumoured indicative bid level of 68p/share for its holding in Caledon Resources, we calculate an underlying value per share of 9.4p for Polo. However, this value does not include anything for either the significant upside potential from Caledon’s Minyango coal reserve coming on stream (combined with the priority capacity at the soon-to-be-built Wiggins Island Coal terminal) nor the long awaited development of coal-fired power production in Bangladesh for GCM.
Thus at the current share price, we would expect the shares to continue to outperform the market and their peers.

Seeing Machines Limited (SEE 3.62p/£14.71m)Another week, another contract awarded. Seeing Machines, the developer of advanced vision based industrial systems, announced that it has been awarded a contract to install DSS driver monitoring equipment for a fleet of vehicles at an open pit mine in Peru. Having written on Seeing Machines extensively before, this comes as little surprise to us and the Company continues to go from strength to strength. We’ve no doubt that the future holds great potential for further contract gains for the DSS driver monitoring product, and the versatility of the Company’s technology should lead to further contracts being awarded by clients in other industries, particularly the virtual gaming industry. We continue to delight at a company that can be seen to be going places.

Suretrack Monitoring (STMP 0.88p/£5.82m)SureTrack Monitoring, commenced trading on AIM today, with a total of 661,347,670 shares in issue. In addition, the necessary resolutions to enable the reorganisation of the share capital were passed at the General Meeting. Once sanctioned by the Courts, the ordinary shares will have a nominal value of 0.05p. (The deferred shares, of nominal value 0.95p, that will be created by the reorganisation will be cancelled.)
With the £1.4m raised during the recent placing and the Company poised for an exciting period of growth, we would encourage investors to pick up the shares at current levels.

Synairgen (SNG 24.75p / £14.79m)The Aim-listed respiratory drug discovery and development company had a run of announcements last week. First were the preliminary results for the year ended 30 June 2010- Synairgen spent the same amount in research and development as it did during the previous year (£2.1 million), with most of the expenditure during the year being spent on clinical development programmes. After tax loss for the year: £2.6 million (2009: £2.5 million), which results in a loss per share of 4.27p and cash at year end of £5.0 million (2009: £7.9 million).
The Company also restructured their Board, promoting Dr Phillip Monk to both Executive Director and Chief Scientific Officer. Synairgen will now focus on progressing the asthma, influenza and COPD programmes.

Vatukoula Gold Mines (VGM 1.9p/£69.94m)This is our first time of writing on Vatukoula Gold Mines plc, having taken notice of the company when it reported a 74 percent increase in revenues with its interim results at the end of May.
VGM has both underground and surface/open pit workings located in the northern part of Viti Levu, the main island of Fiji, which has a history prodigious gold mining. The Vatukoula mine commenced production in 1933 and has produced 7 million ounces of gold (and over 2 million ounces of silver). Over the ten years to 2005, just prior to when production was halted, the average annual tonnage of ore mined was c. 563,220 – with 121,060 ounces of gold recovered. The mine and licences were acquired in April 2008 with the aim of bringing the mine back to full production and increasing the measured reserves. As should be expected in the mining industry, VGM experienced delays in its aims to return to the previous production levels – but is now seen to be firmly on track to achieving, and surpassing its goal.
The costs of production are running at c. US$630/oz Au – which is high, but expected to fall dramatically once production increases from the current guidance on this year’s production of c. 54,000 oz Au to the initial management target of 100,000 oz Au. In fact, the 7 weeks production to 21 July was c. 41,500 tonnes of ore mined, producing 13,500 oz Au (285,000 and 92,500 annualised respectively) – though we do not expect to see these excellent parameters maintained throughout the forthcoming year.
The Company is well financed, having recently raised £7.4m to carry out detailed exploration of three very attractive prospects and to produce a feasibility study for its own power production facility. We are expecting continued good news on the production ramp up along with positive exploration results to drive the share price higher over the forthcoming 12 months.

*A corporate client of Hybridan LLP

The Hybridan Small Cap Wrap is a weekly review of some of the most interesting small cap stories of the past week. Our review will usually be of those companies whose market capitalisations are less than £50m although we may occasionally cover larger companies.

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